A year in the markets - and what this means for your super balance
25 Jul 2008
There was not much joy for investors over the past year. Markets across the globe endured massive volatility resulting from the US sub-prime mortgage crisis and its aftershocks, talk of US recession, rising inflation and oil prices.
For the majority of Australian super investors this means that their super balance may have gone backwards since 30 June 2007.
In the period 1 July 2007 to 30 June 2008, investors with exposure to growth assets (such as shares and property) will have experienced negative returns. Growth assets have demonstrated better performance over the long term*, but carry a greater risk of short term loss than financial assets (such as cash or fixed interest). These periodic negative returns are unfortunately part of the normal cycle of investment markets. The more conservative asset classes such as cash and fixed interest experienced modest but positive returns for the 12 month period.
The results
Shares
Share markets were hit hard. Significant contributors to the market’s slide were financial stocks (such as banks) with a -31.7% (1) full year return and industrials returning -33.6%(2) for the year.
The Australian stock market (S&P/ASX300 Accumulation Index) lost further ground in June, after a slight rally in May, to finish the year at -13.7%.
The US (S&P500) finished the year on -14.9% after a dramatic 8.6% loss in June, while technology (NASDAQ) managed -11.9% for the year.
The UK market posted negative returns for both May and June and ended the year with the same result as the US, -14.9% (FTSE100). The German DAX ended the year with -19.8%, and the French stock market was down -26.8% (CAC40).
While Japan (NIKKEI) posted a negative 6.0% June result, to end the year at -25.7%.
Overall, international stock markets returned -8.6% in June (MSCI World Ex Australia in $A (unhedged)), to post a full year loss of -21.3%.
Property
The woes for property continued. In June, Australian listed property declined 10.9% (S&P/ASX200 Property Trust Accumulation Index), further to a decline of 9.0% the previous month, losing -36.4% for the year.
Fixed interest
The Australian bond market (UBS Australia Composite Bond Index) returned 0.3% in June finishing the year on a positive note with a 4.4% return. The international bond markets (Lehman Bros Global Aggregate Index (hedged to $A)) returned 7.9% for the year.
Cash
The Australian short-term money market returned a healthy 7.4% (UBS Warburg Australia Bank Bill Index) for the year after another gain for June of 0.6%.
What about Telstra Super?
Like all funds, Telstra Super’s returns have been significantly impacted by the market collapses of the past 12 months. But, as Telstra Super takes a 3-5 year view in determining our investment strategies, we have avoided unnecessary knee jerk reactions to the market falls, although some protective measures have been employed.
However, all Telstra Super investment options with exposure to share markets and property have experienced significant declines in returns this year compared to previous years, on the back of the poor performances in these asset classes globally.
Our Growth and Balanced options (in which the majority of our accumulation members are invested), are designed with high weightings to shares and property (90% for the Growth option and 70% for the Balanced option). And while this has resulted in record returns for Telstra Super over the past few years (see Telstra Super’s performance over 1, 3 and 5 years), on the flip side it has meant that this year’s returns have been disappointing.
However, as a result of the weighting to growth assets, investment options such as Growth and Balanced will be well positioned for a market rebound. This was evidenced in our April performance – Telstra Super posted positive returns across all our investment options, in response to an improved market for that month, with Growth returning 3.67% and Balanced 2.60%.
Issues surrounding the US sub-prime crisis and hiking oil prices are still working their way through the system, and despite emerging value, there is still a lot of risk in the system. At the same time, central banks are working to support investment markets and maintain investor confidence.
The road to recovery
Despite an unstable 12 months on the investment front, history is on our side. In the past, periods of significant market volatility and resulting downturns, have been relatively short compared to the recovery and growth periods of the investment cycle.
The periods of negative share market returns since 1981, illustrate the point:
- In 1982, Australian shares returned –29% and international shares -4%, on the back of a global recession. The following year, Australian shares returned 34.7% and international shares an amazing 72.7%.
- 1987, was the now infamous year of the October Wall Street collapse, followed by severe declines in sharemarkets globally. By the end of the 1987/1988 financial year, Australian shares returned -8.6% and international shares -10%. Continued poor returns would not have been surprising, yet Australian shares returned 3.5% for 1989, while international shares rebounded with 18.1%.
- 2001 to 2003 saw markets impacted by the Tech Wreck and terrorist attacks. International shares were negative throughout this period, and Australian shares experienced negative returns in 2002 and 2003. But the following 4 years performed strongly, with a return to a growth period for shares.
These examples underscore the importance of viewing investments (in particular shares) as a long-term proposition, rather than at a point in time in the investment cycle. Not only can market declines occur quickly. Rebounds can seem just as unexpected.
As the investment experts will say, you should not be put off your investment strategy due a short-term market event – good or bad.